Fed could be to blame for oil’s decline: Analyst

The dramatic 10-month drop in the price of oil could be due to ultra-loose monetary policy by the U.S. Federal Reserve, according to a senior analyst at a major financial services company.

Mark Lewis from Kepler Cheuvreux said on Monday that the boom in U.S. shale gas production over the last few years that had helped push down oil prices was partly driven by the Fed’s “very, very low interest rates.”

“The financial dimension to the shale story is hugely important,” he told CNBC. “I think it’s questionable whether we would ever have had the increase in oil production we’ve had out of the shale plays over the last three or four years if we hadn’t been in this environment.”

The Fed has held its target range for the federal funds rate at 0-0.25 percent since the end of 2008. With rates so low, banks have been able to lend money at cheaper rates than would be usual in a healthy economic environment.

Lewis said that the nascent shale industry—in which the “unconventional” gas is drilled from the ground in a process known as hydraulic fracturing or “fracking”— has boomed as a result of access to ultra-cheap financing, flooding the market as a result.

Many analysts, including the International Energy Agency, see high U.S production as a key factor behind the price drop, along with global weak demand and the Organization of the Petroleum Exporting Countries (OPEC)’s refusal to cut its own production.

The Fed started aggressively expanding its balance sheet shortly after the global financial crash of 2008, in a program that became known as QE 1. The central bank then started a second program in 2010, before launching its third open-ended $85 billion-a-month program in late 2012.

This aggressive easing has now been dialed back and the Fed is widely expected to raise its main benchmark interest rate this year.


This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Craig Erlam

Craig Erlam

Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam
Craig Erlam

Latest posts by Craig Erlam (see all)